Gresham and Defoe (Underwriters)

13th March 2014

Gresham and Defoe (underwriters):

The Origins of London Marine Insurance

Professor Adrian Leonard

Marine insurance is very old. It has a low profile – bankers seem to take all the heat – but it has been an important part of London’s international financial services offering for centuries. Marine insurance arrived in London more than 250 years before Edward Lloyd started his Coffee-house, and about 150 before the Royal Exchange was officially opened by Queen Elizabeth. Underwriters were laying down lines in London at latest by the 1420s, but still, marine insurance is quite a bit older than that.

In the hour ahead I am going to tell you about the origins of marine insurance in Italy, its spread to the great port cities of north western Europe in the late middle ages, and how it came to be that London began – and continues – to dominate the world in this important commercial sector. Along the way we will meet some familiar characters, we will learn about great, ruinous catastrophes that knocked out some who were over-exposed, and – perhaps most interesting – we will see that the way marine insurance is done in London really hasn’t changed very much over the many centuries this talk will cover.

The earliest really solid evidence of marine insurance is found in the archives of the city states of Italy – Genoa, Florence, Venice, and the rest. Merchants of the fifteen hundreds called this region Lombardy.

In the thirteen and fourteen hundreds, Italians were the masters of world trade. The Germans of the Hanseatic league controlled the lucrative business of bringing goods from the Baltic Sea region to the rest of Europe, but it was Italian merchants, with their Mediterranean access to the luxury goods from Asia and North Africa, who set the standards.

This was no business for the faint of heart. Trade in the early age of sail fundamentally precarious, unpredictable, and fraught with perils. Merchants often had no choice but to bear the dangers – to ‘run the risk’ – of naked threats. At worst, these could mean the complete destruction of a season’s invested capital, spelling ruin for an individual merchant-adventurer.

The rage of the oceans often caused the total loss of ships and their cargoes, or inflicted extensive damage before goods reached markets. Such natural perils were known in early policies as of those of maris, the seas. The violence of men, gentium, came in the form of warships, pirates, and privateers. These could present an even greater danger, especially in wartime, when human risks to trade were recurrent and grave. At their heights, enemy onslaughts against seaborne trade could endanger the whole commerce of a country, imperilling its military success, and potentially even, its independent survival.

Italian merchants began to deal with this very real problem – and we need only to think of the plight of Antonio, the Merchant of Venice, to see how real it was –at some point in the late 1200s, or perhaps the early 1300s. Men like Antonio invented marine insurance. Research undertaken long ago by historians, including the Italian Enrico Bensa in the 1880s and Florence Edler De Rooverin the 1930s, leaves little doubt about these origins. Genuine insurance was a product of the late medieval commercial revolution, which occurred in Italy during the half-century from 1275 to 1325. This “revolution”also saw the development of bills of exchange and double-entry bookkeeping, both of which, like marine insurance, remain in use today, pretty much unchanged.

In inventing marine insurance, Lombard merchants figured out the most effective and efficient means of minimising the impact of the threats to trade presented by the seas and by men. The financial instrument was designed to spread the cost of losses at sea as widely as possible amongst the merchant community, and thus among the end-consumers of internationally traded goods. It worked remarkably well.

The idea wasn’t entirely new, even then. Earlier financial instruments provided merchants with relief if – in the words of this English policy of the 1550s, “God’s will shall be that their ship shall not well proceed”.

Called “sea loans”, the predecessors to marine insurance were very simple. Merchants borrowed money from an investor, and if their ship sank, or their goods were lost, the loan was forgiven. Sea Loans are mentioned in the writings of Demosthenes, an exact contemporary of Aristotle. In an early example of state intervention in markets, the Byzantine Emperor Justinianfixed the price of sea loans at twelve per cent in the year 533 AD.Regulations governing Sea Loans were set out in Emperor Basil I’s Basilica, and in Roman law, which calls themnauticum foenus.

Variations on the structure such as the Italian cambium nauticum had a third, and perhaps more important function. They allowed merchants to borrow money at interest, which was prohibited under Catholic usury laws. The interest on the loan was disguised as a risk premium, and the scholars of the church deemed this sort of transaction acceptable in the eyes of the Vatican.

So much for ancient history. These early instruments of risk transfer all had the samedrawback: the buyer also had to be a borrower. Marine insurance disconnected insurance from borrowing. As trade expanded, marine insurance took off like a celebrity rumour in the twitter-sphere.For example, in just three weeks between 21 August and 15 September of 1393, the Genoese notary Theramus de Majolo was involved in more than eighty insurance transactions.

Already by this time, many of the contemporary practices of marine insurance were adopted and perfected. Multiple underwriters participated in each policy, assuming a proportion of the sum insured. This spread the risk broadly. The policy on the screen shows this: each participating insurer has signed his name below the policy, making him and ‘under-writer’, or, in a different language, a ‘sub-scriber’. These early underwriters charged a premium which was expressed as a percentage of the sum insured, and which varied based on the characteristics of both the vessel and the voyage to be insured. These rates were adjusted according to the loss experience, and to various threats related to a specific voyage, such as the season, or the activity of corsairs. The underwriters specified the broad perils which were to be insured under the policy, and included in the contract the name of the insured vessel,the nature of the cargo, and the details of its voyage. Policies were often arranged by intermediaries. Most of the underwriters were merchants themselves, although by the fifteenth century wealthy investors were also taking lines on insurance contracts. Insurers’ salvage rights were established in principle, if not in law. So too was the insurers’ preferred recourse to arbitration, should disputes arise. You can see that this policy, from 1555, specified that the parties agreed, should a dispute arise, “to remit it to honest merchants, and not to go to law”.

London was a relatively unimportant trade city in the early fifteenth century, which is perhaps why the earliest accessible map we have of the city is from 1572. Notably, Lombard Street was clearly established at this time, but one hundred and fifty years earlier, much of her trade was controlled by German merchants of the Hanseatic League, who were to be expelled a century later (with the support of Sir Thomas Gresham). Italian merchants handled the trade with Southern Europe. The Dutch were not yet important.

It is in the transactions of those Italian merchants – the traders of Lombard Street – where we find the earliest evidence of marine insurance in London. The records of businesses and the courts have preserved the clues.

The prize for the oldest surviving record yet found must go to an entry in the Plea Rolls of the City of London. In 1426, Alexander Ferrantyn, a Florentine merchant resident in London, took his insurance dispute to the Lord Mayor and Aldermen. He had purchased insurance from some other resident Italians.

Ferrantyn’s case was heard in the Guildhall. He was refused a claim for his vessel, the ‘Seint Anne of London’, which was carrying a cargo of wine to England from Bordeaux. Both the vessel and the cargo were covered for £250 by seventeen Italian merchants resident in London. The assets had been seized by Spaniards, but Ferrantyn, through an agent, had managed to buy-back the vessel and cargo, which the privateers – the licensed pirates of this age of plunder – had sold to Flemish merchants.

The policyspecified that the ‘order, manner, and custom of the Florentines’ was to govern the contract. Ferrantyn asked his insurers to pay up, citing ‘the law merchant’, and the clause about Florentine custom. Clearly,in these early days of London insurance, accepted local practice was undeveloped, or carried little weight. However, we will see later that London practices went on to govern much of the world’s marine insurance,.

The disputing parties claimed respectively that Florentine custom required the indemnity to be paid in this circumstance, and that it did not. Both parties promised to produce notarised testimony from the Italian city which would outline the prevailing local custom. So confident were the defending insurers that they paid into the court the disputed £250, plus £100 as surety.

Ferrantyn’s insurance-buying was not isolated. Filippo Borromei & Co. of Bruges and London was just one bank of many in the extensive network of the eponymous Italian merchant-banking family. Its surviving ledgers show that the London branch of the bank made regular and routine insurance transactions in London in the 1430s. For example, on 10 January 1438, a clerk in the London office recorded a transaction with its parent, the Bruges bank, as follows: ‘credited to their conto a parte [their account], for cloth, for 50 pieces of Essex streits [a broadcloth one yard wide], bought for £st 31.5.0; insurance at £st 1.16.8’.

The identity of the underwriters of these policies has, in some cases, survived. The Borromei ledgers refer to ‘insurance underwritten by us on the cargo and ship of Giovanni Tanzo’, indicating that the bank itself would sometimes assume insurance risk. This was typical – buyers of insurance were often sellers, too, The bank’s Bruges ledger of the same year names the underwriters, which include three individuals and one partnership, all of which appear to be of Italian extraction. The seventeen London merchant-insurers named as defendants in the Ferrantyn case include two each who were natives of Venice, Genoa, and Florence, and eleven who are unidentified, but whose surnames also indicate Italian origin.

In 1480, two of London’s leading Italian merchants took an insurance concern to the Mayoral court. Antonio Spynule, a resident Genoese merchant, and his English attorney appeared before the Lord Mayor and aldermen. Spynule wished simply to attest to the receipt of an insurance premium of £6.13s.4d from the local merchant Marco Strozze. The policy by this time is described as a ‘bill of assurance’, but it had been lost.

It is safe to conclude from this evidence that the community of Italian merchants in London insured regularly in the early fifteenth century, and did so primarily amongst themselves. They comprised London’s earliest generations of merchant-insurers, and their practice was typical of its time.

As soon as there was insurance, there was insurance fraud. A story in the Great Chronicle of London shows that dishonest buyers would sometimes attempt to defraud underwriters. The anonymous chronicler recounted the story of a rogue trader who, at some point before 1509, thought

To stuff ships with false, crafty balances

Such as blocks & stones, and counterfeit dalliances

And after, insure the said ships with their freight

For great sums, till they come on the height

Of the ocean, and then cause them to drown

That the insurance, might for nought be paid.

Notwithstanding the terrible quality of the verse, the passage shows that underwriters have always been in imperilled by the unscrupulous – although in this case, according to the chronicler, the fraudster was caught.

A similar fraud was recorded by Samuel Pepys in his diary. A trial was held at Guildhall in 1663, before the King’s Bench. According to Pepys, Lord Chief Justice Hyde, with ‘all the great counsel in the kingdom in the case’, heard how an unnamed ship’s master over-insured a ship laden with bogus cargo worth, at most, £500. But a notorious deception was underway. The cargo was actually ‘vessels of tallow daubed over with butter, instead of all butter’. The criminal abandoned the ship, to let it flounder on the rocks at low tide. He refused the aid offered by nearby ships’ pilots who came to his assistance. The judge found in favour of the insurers, one of whom had salvaged the ship, uncovered the fraud, and later repaired the vessel for just six pounds.

Much of the sixteenth-century evidence of insurance in London survives in policies preserved in the records of the High Court of the Admiralty. They are in a sorry state, as the examples pictured show. The jurisdiction of this court varied dramatically over the years, but was at its height in the Tudor century.

The earliest policy I have found in these records was underwritten in 1547. It reveals much about insurance in our city at this date. The policy is written in Italian, but the buyer – one John Brook – and the underwriters, William Maynard and Thomas Lodge, clearly are not. It was common, we learn from other evidence, for policies at this time to be written in multiple languages, for the convenience of merchants involved in multinational trade. In this case the cargo, a shipment of grapes from Crete, was being transported from the island to London on board the Venetian shipSanta Maria, which may explain the language of the policy. The insurance was to cover only the portion of the journey from Cadiz.

Of particular interest is the clause which governs the jurisdiction of disputes. We will remember that the Ferrantyn policy was governed by the customs of Florence. 121 years later, this policy states clearly that ‘it is to be understood this present writing hath as much force as the best made or dicted bill of assurance which is used to be made in this Lombard Street of London’. The particular custom which was to govern the policy was that of the merchants of Lombard Street. The phrase ‘dicted bill’ suggests the validity at this time of verbal contracts of insurance, and that they carried the full weight of customary law.

What was this mutable, customary law? It was the Law Merchant, the unwritten code of practice followed by merchants. It had some regional differences, as we have seen. It set out the rules of the game for insurance buyers and underwriters, such as those upon which the Farrantyn case turned. John Weskett, an insurance underwriter, member of Lloyd’s, and an apparently irascible chap, wrote a book in 1781 called A complete digest of the theory,
laws, and practice of insurance. In it he described the Law Merchant, which was clearly still important in his day.

Because it changed from place to place, insurers usually named in their policies the location-specific body of Law Merchant which was to govern the contract. By examining these statements, we can learn something about the importance of London as an underwriting centre.

We saw that in 1547, a London policy cited Lombard Street. Another policy, issued in 1552 to insure the Florentine merchant Robert Ridolfi (better known for his plot to assassinate the queen), also mentions only Lombard Street. However, a sort-of expert opinion which accompanies it states that ‘the use and custom of making bills of assurance in the place commonly called Lombard Street of London, and likewise in the Bourse of Antwerp, is, and time out of mind hath been, among merchants using and frequenting the said and several places...’ This hints that Antwerp custom was still being taken into account by the courts.

A further policy, drawn up in 1555 to insure the Portuguese merchant Anthony de Salizar, makes the Antwerp connection directly. It states that ‘this assurance shall be so strong and good as the most ample writing of assurance which is used to be made in the street of London [that is, Lombard Street] or the bourse of Antwerp.’ Meanwhile, a 1566 policy underwritten in the Flemish city refers to London’s authority. It seems that merchants were flexible as to the body of Law Merchant which was to apply in these early days. Such flexibility allowed the rules to change with the times.

The next major change in the clause happened in the late 1570s, and was the responsibility of a man named Richard Candeler. An agent of Thomas Gresham, Candeler began to loom large in London’s vibrant insurance market in that decade. He was granted a royal patent which gave him the exclusive right to the ‘making and registering of all assurances, policies and the like upon ships and goods going out of or into the realm, made in the Royal Exchange or any other place in the city of London’.